SEC News Digest

Issue 2012-192 October 3, 2012

ENFORCEMENT PROCEEDINGS

In the Matter of CRC Crystal Research Corp.

An Administrative Law Judge (ALJ) issued an Order Making Findings and Revoking Registration by Default as to CRC Crystal Research Corp. (Default Order) in Alliance Bancshares California, Admin. Proc. File No. 3-14956. The Default Order finds that CRC Crystal Research Corp. (CRC Crystal), an issuer of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 (Exchange Act), failed to comply with Section 13(a) of the Exchange Act and Exchange Act Rules 13a-1 and 13a-13 by failing to file required periodic reports with the Securities and Exchange Commission (Commission). As a result, the ALJ ordered that the registration of each class of CRC Crystal’s registered securities is revoked.

This proceeding began with seven Respondents. On August 27, 2012, the ALJ issued an Order Making Findings and Revoking Registrations by Default as to Five Respondents, and on August 31, 2012, the Commission issued an Order Making Findings and Revoking Registration of Securities as to Clear Choice Financial, Inc. Alliance Bancshares California, Exchange Act Release Nos. 67730, 67763. (Rel. 34-67968; File No. 3-14956)

The Securities and Exchange Commission today charged Boston-based dark pool operator eBX LLC with failing to protect the confidential trading information of its subscribers and failing to disclose to all subscribers that it allowed an outside firm to use their confidential trading information.

According to the SEC’s order instituting a settled administrative proceeding, eBX operates the alternative trading system LeveL ATS, which it calls a “dark pool” trading program. Dark pools do not display quotations to the public, meaning that investors who subscribe to a dark pool have access to potential trade opportunities that other investors using public markets do not. eBX inaccurately informed its subscribers that their flow of orders to buy or sell securities would be kept confidential and not shared outside of LeveL. eBX instead allowed an outside technology firm to use information about LeveL subscribers’ unexecuted orders for its own business purposes. The outside firm’s separate order routing business therefore received an information advantage over other LeveL subscribers because it was able to use its knowledge of their orders to make routing decisions for its own customers’ orders and increase its execution rate. eBX had insufficient safeguards and procedures to protect subscribers’ confidential trading information.

eBX agreed to pay an $800,000 penalty to settle the charges.

“Dark pools are dark for a reason: buyers and sellers expect confidentiality of their trading information,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Many eBX subscribers didn’t get the benefit of that bargain – they were unaware that another order routing system was given exclusive access to trading information that it used for its own benefit.”

According to the SEC’s order, eBX and the outside firm it hired to run LeveL signed a subscription agreement in February 2008, after which the outside firm’s separate order routing business began to use certain LeveL subscribers’ confidential trading data. In November 2008, eBX signed a new agreement with the outside firm that allowed its order routing business to remember and use all LeveL subscribers’ unexecuted order information. As a result of the agreements, the outside firm’s order routing business began to fill far more of its orders than other LeveL users did. Its order router also knew how other eBX subscribers’ orders in LeveL were priced and could use that information to determine whether to route orders to LeveL or another venue based on where it knew it might get a better price for its own customers’ orders.

According to the SEC’s order, eBX failed to disclose in required SEC filings that it allowed LeveL subscribers’ unexecuted order information to be shared outside of LeveL.

In addition to the $800,000 penalty, eBX was censured and ordered to cease and desist from committing or causing further violations of certain provisions of the federal securities laws regulating alternative trading systems.

The Securities and Exchange Commission today announced that it has obtained an emergency court order to freeze the assets of a South Florida man who has been charged with fraudulently offering investments in oil drilling projects.

The SEC’s complaint unsealed today in federal court in West Palm Beach, Fla., alleges that Joseph Hilton made numerous misrepresentations to investors while selling limited partnership units in two oil drilling projects earlier this year through his firm Pacific Northwestern Energy LLC. Hilton falsely told potential investors that Pacific acquired its wells from Exxon Mobil Corp., and he overstated Pacific’s experience in the oil and gas industry and the historical accomplishments of its drillers. Hilton raised approximately $789,000 from investors. The SEC’s action froze the assets of Hilton, Pacific, and the two limited partnerships – Rock Castle Drilling Fund LP and Rock Castle Drilling Fund II LP. Hilton’s securities offerings were not registered with the SEC as required under the federal securities laws.

The SEC’s complaint also includes allegations against Hilton, Pacific, and another company controlled by Hilton called New Horizon Publishing Inc. Through Pacific and New Horizon, Hilton additionally sold $2.5 million worth of investments in oil drilling projects sponsored by United States Energy Corp. while deceiving investors about his identity, the anticipated returns on the investments, the amount of oil being produced by U.S. Energy’s wells, and the existence of natural gas wells. Hilton also operated a boiler room of sales representatives paid on a commission basis.

According to the SEC’s complaint, Hilton changed his name from Joseph Yurkin late last year following a final judgment for fraud in a previous SEC enforcement action against him for securities offerings he made through another company he worked for – Homeland Communications Corp.

“By changing his name, Hilton thought he could evade further SEC scrutiny and keep the investing public from finding the truth in his background,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “The SEC is committed to pursuing repeat offenders and ensuring the open and transparent sale of securities to investors.”

The SEC’s complaint charges Hilton, Pacific, Rock Castle I and Rock Castle II with violations of Sections 5(a) and (c) and 17(a)(2) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b). The complaint also charges Hilton with violations of Securities Act Section 17(a)(1), (2), and (3) and Exchange Act Sections 15(a), 10(b) and Rule 10b-5(a), (b) and (c). Pacific and New Horizon are charged with Exchange Act Section 15(a) violations in connection with their historical U.S. Energy related conduct. The SEC is seeking disgorgement of ill-gotten gains plus prejudgment interest, financial penalties, and permanent injunctions against Hilton and his entities.

The court has appointed David Mandel – an attorney with the law firm of Mandel & Mandel LLP in Miami – as a receiver over Pacific, Rock Castle I, and Rock Castle II. Among other things, the receiver is responsible for marshaling and safeguarding assets held by these entities.

SEC Charges Hedge Fund Managers With Defrauding Investors

The Securities and Exchange Commission today separately charged a pair of hedge fund managers and their firms with lying to investors about how they were handling the money invested in their respective hedge funds. The charges are the latest in a series of actions taken by the SEC Enforcement Division and its Asset Management Unit against hedge fund-related misconduct in the markets.

In one case, the SEC alleges that San Francisco-based hedge fund manager Hausmann-Alain Banet and his firm Lion Capital Management stole more than a half-million dollars from a retired schoolteacher who thought she was safely investing her retirement savings in Banet’s hedge fund. In the other case, the SEC charged Chicago-based hedge fund managers Norman Goldstein and Laurie Gatherum and their firm GEI Financial Services with fraudulently siphoning at least $147,000 in excessive fees and capital withdrawals from a hedge fund they managed.

Since the beginning of 2010, the SEC has filed more than 100 cases involving hedge fund malfeasance such as misusing investor assets, lying about investment strategy or performance, charging excessive fees, or hiding conflicts of interest. The SEC today issued an investor bulletin detailing some of those cases as examples of why investors must rigorously evaluate a hedge fund investment before making one.

“These hedge fund frauds have lured even the most sophisticated investors using the siren song of outsized returns or secured and guaranteed investments,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “As fraudsters increasingly capitalize on the cachet of hedge funds, we will maintain our strong presence in policing this industry.”

In the past few weeks alone, the SEC has charged an Atlanta-based private fund manager and his firm with defrauding investors in a purported “fund-of-funds” and then trying to hide trading losses, charged a hedge fund adviser in Oregon with running a $37 million Ponzi scheme through several hedge funds he managed, and charged a New York-based hedge fund manager who touted a diversified and controlled-risk investment strategy for his fund while in reality misusing investor assets to prop up a failing private company. The New York-based fund manager also failed to disclose conflicts of interest, and he falsely overstated his firm’s assets under management in various magazine articles he authored.

According to the SEC’s complaint filed against Banet and Lion Capital Management in federal court in San Francisco, Banet led the teacher to believe that his hedge fund would invest in the stock market using a long/short equity investing strategy. Instead, Banet brazenly took the teacher’s investment totaling $550,000 and used it to pay unauthorized personal and business expenses, including his home mortgage, office rent, and staff salaries. Banet also provided phony account statements showing non-existent investment gains and listing an independent administrator that performed no actual work for the fund.

In a parallel action, the U.S. Attorney’s Office for the Northern District of California today announced criminal charges against Banet. The SEC acknowledges the assistance and cooperation of the U.S. Attorney’s Office, Federal Bureau of Investigation (FBI), and Immigration and Customs Enforcement (ICE).

According to the SEC’s complaint against Goldstein, Gatherum, and GEI Financial Services filed in federal court in Chicago, investors in the hedge fund were not told that its adviser removed various performance hurdles when calculating fees. Furthermore, inappropriate capital withdrawals were made from the fund. Goldstein, Gatherum, and their firm never told their advisory clients that Illinois regulators had stripped Goldstein of his securities registrations in 2011, barring him from providing investment advisory services in the state. But even after losing his registration status, Goldstein continued to make all investment decisions on behalf of clients, and he and Gatherum caused GEI Financial Services to violate compliance rules applicable to SEC-registered investment advisers.

The SEC’s investigation of Lion Capital Management was conducted by Sahil Desai and Robert Leach of the Asset Management Unit in the San Francisco Regional Office. John Yun is leading the SEC’s litigation. The SEC’s investigation of GEI Financial Services – which stemmed from an Asset Management Unit initiative to detect misconduct by pursuing registered investment advisers with repeated compliance examination deficiencies – was conducted by Andrew Shoenthal, Jeson Patel, Malinda Pileggi, Vanessa Horton, and Paul Montoya of the Chicago Regional Office. John E. Birkenheier is leading the litigation.

The SEC’s investor bulletin on hedge funds was prepared by the Office of Investor Education and Advocacy. It recommends that investors understand a hedge fund’s investment strategy and its use of leverage and speculative techniques before making the investment. It also explains the need to evaluate a hedge fund manager’s potential conflicts of interest and take other steps to research those managing the fund.

INVESTMENT COMPANY ACT RELEASES

Prudential Short Duration High Yield Fund, Inc.

Prudential Investments LLC

An order has been issued on an application filed by Prudential Short Duration High Yield Fund, Inc. and Prudential Investments LLC, under Section 6(c) of the Investment Company Act of 1940 (Act) for an exemption from Section 19(b) of the Act and Rule 19b-1 under the Act. The order permits certain registered closed-end investment companies to make periodic distributions of long-term capital gains with respect to their outstanding common shares as frequently as monthly in any one taxable year, and as frequently as distributions are specified by or in accordance with the terms of any outstanding preferred shares that such investment companies may issue. (Rel. IC-30226 - October 2)

SELF-REGULATORY ORGANIZATIONS

Immediate Effectiveness of Proposed Rule Changes

A proposed rule change filed by EDGX Exchange, Inc. relating to EDGX Rule 11.5 to add a new order type (SR-EDGX-2012-44) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of October 1. (Rel. 34-67959)

A proposed rule change filed by EDGA Exchange, Inc. relating to EDGA Rule 11.5 to add a new order type (SR-EDGA-2012-44) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of October 1. (Rel. 34-67960)

ICE Clear Credit LLC (ICC) filed a proposed rule change (File No. SR-ICC-2012-15) under Section 19(b)(1) of the Securities Exchange Act of 1934, which became effective upon filing, to amend Schedule 502 of the ICC Rules for the September 20, 2012 and September 27, 2012 scheduled index series listings. Publication is expected in the Federal Register during the week of October 1. (Rel. 34-67964)

A proposed rule change filed by NASDAQ OMX PHLX LLC to offer members and member organizations the ability to pay a regulatory fine pursuant to an installment plan (SR-Phlx-2012-117) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of October 1. (Rel. 34-67966)

A proposed rule change filed by NASDAQ OMX BX, Inc. to offer members the ability to pay a regulatory fine pursuant to an installment plan (SR-BX-2012-062) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of October 1. (Rel. 34-67967)

Designation of Longer Period for Commission Action on Proposed Rule Changes

The Commission has designated a longer period for Commission action under Section 19(b)(2) of the Securities Exchange Act of 1934 on proceedings to determine whether to approve or disapprove a proposed rule change (SR-NASDAQ-2012-043), as modified by Amendment No. 1 thereto, filed by The NASDAQ Stock Market LLC to establish the Market Quality Program. Publication is expected in the Federal Register during the week of October 1. (Rel. 34-67961)

The Commission has designated a longer period for Commission action under Section 19(b)(2) of the Securities Exchange Act of 1934 on proceedings to determine whether to approve or disapprove a proposed rule change (SR-NYSEArca-2012-37) filed by NYSE Arca, Inc. proposing a pilot program to create a Lead Market Maker issuer incentive program for issuers of certain exchange-traded products listed on NYSE Arca, Inc. Publication is expected in the Federal Register during the week of October 1. (Rel. 34-67962)

Accelerated Approval of Proposed Rule Change

The Commission granted approval of a proposed rule change (SR-NYSEArca-2012-82) submitted by NYSE Arca, Inc. pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 and Rule 19b-4 thereunder relating to the listing and trading of FlexShares Ready Access Variable Income Fund under NYSE Arca Equities Rule 8.600. Publication is expected in the Federal Register during the week of October 1. (Rel. 34-67963)

Designation of Longer Period for Commission Action

The Commission has designated a longer period for Commission action under Section 19(b)(2) of the Securities Exchange Act of 1934 on proceedings to determine whether to approve or disapprove a proposed rule change (SR-NYSEArca-2012-28) filed by NYSE Arca, Inc. to list and trade shares of the JPM XF Physical Copper Trust pursuant to NYSE Arca Equities Rule 8.201. Publication is expected in the Federal Register during the week of October 1. (Rel. 34-67965)

SECURITIES ACT REGISTRATIONS

The following registration statements have been filed with the SEC under the Securities Act of 1933. The reported information appears as follows: Form, Name, Address and Phone Number (if available) of the issuer of the security; Title and the number and/or face amount of the securities being offered; Name of the managing underwriter or depositor (if applicable); File number and date filed; Assigned Branch; and a designation if the statement is a New Issue.

Amendments to the Registrant's Code of Ethics, or Waiver of a Provision of the Code of Ethics

5.06

Change in Shell Company Status

6.01

ABS Informational and Computational Material.

6.02

Change of Servicer or Trustee.

6.03

Change in Credit Enhancement or Other External Support.

6.04

Failure to Make a Required Distribution.

6.05

Securities Act Updating Disclosure.

7.01

Regulation FD Disclosure

8.01

Other Events

9.01

Financial Statements and Exhibits

8-K reports may be viewed in person in the Commission's Public Reference Branch at 100 F Street, N.E., Washington, D.C. To obtain paper copies, please refer to information on the Commission's Web site at http://www.sec.gov/answers/publicdocs.htm. In most cases, you can view and download this information by using the search function located at http://www.sec.gov/edgar/searchedgar/companysearch.html.